US Municipals: A Tale of Two Markets and a Knight in Shining Armor
A Perspective from Invesco Fixed Income
The municipal bond market has seen a nice recovery in investment grade names over the last few weeks. The new issue calendar remains light, with the big coupon reinvestment and maturity months of June and July right around the corner.
Yields on investment grade municipal bonds (as represented by the Bloomberg Barclays Municipal Bond Index), have recovered to roughly where they started the year, though they are still above the lows reached prior to the pandemic in early March. However, yields represented by the Barclays Bloomberg Municipal High Yield Index are still well above the levels reached at the beginning of the year and the lows set before the pandemic. Accordingly, the spread, or difference between the two yields, has steadily increased since March. We believe this presents an opportunity to be taken advantage of by active managers. Many names in the high yield or BBB space have been guilty by association – we believe careful credit work can be advantageous and help position portfolios to benefit from this spread going forward.
A concern on the minds of many market participants is the potential for defaults in the municipal market, which we do not anticipate. To be sure, there will probably be a few defaults that make splashy headlines, but we believe the vast majority of municipal bonds will continue to pay coupons and principal as they come due. What makes us confident in stating this? The federal government has taken decisive action, arriving like a knight in shining armor with financial support. The Municipal Liquidity Facility (MLF) was established to provide market access for states, large cities and large counties and is almost up and running. The mere establishment of the MLF has provided comfort and stability to the municipal market and we believe it will likely help troubled borrowers the most. This support comes on top of the liquidity that the federal government provided in late March to stabilize the ultra-short segment of the municipal market.
Learn more in our sector focus, a discussion on:
- Senior living
- US States